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7. A share of common stock has an expected long-run constant dividend growth rate of -5%, that is, the dividends are declining at 5% per year. The most recent dividend Do, was $5.00. The required rate of return on the common stock is 18%. Then, using the dividend growth model, calculate the current price of the stock. A share of common stock has an expected long-run constant dividend growth rate of 6%. and the most recent dividend D., was $5.00. The stock is currently selling for $50 per share. Calculate the required rate of return on the stock. Also calculate the dividend yield and capital gains yield for the stock

Answer 1

Solution 7
Current Dividend	$         5.00
Rate of return	18.00%
Growth Rate	-5.00%
Share Price at horizon	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at horizon	=5*(1+-0.05)/(0.18--0.05)
Share Price at horizon	$       20.65

Solution 8:

Current Dividend	$         5.00
Rate of return	R
Growth Rate	6.00%
Share Price at horizon	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
50	=5*(1+0.06)/(R-0.06)
50*(R-6%)	=5*(1+0.06)
50*(R-6%)	$         5.30
R-6%=	5.30/50
R-6%=	10.60%
R=	16.60%
Next dividend=	5.3
Share price=	50
Dividend yield=	Next dividend/Share price
Dividend yield=	5.30/50
Dividend yield=	10.60%
Share price after 1 year	=5.3*(1+0.06)/(16.60%-0.06)
Share price after 1 year	$       53.00
Capital gain yield=	(Share price after 1 year - Current price)/Current price
Capital gain yield=	(53-50)/50
Capital gain yield=	6.00%